2017 AICPA newly released questions—auditing

2017 AICPA Newly Released Questions—Auditing AUDITING 2017 AICPA Newly Released MCQs Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing 2017 AICPA Auditing Newly Released MCQs—Medium (Moderate) Rating CPA-06155 As a result of control testing, a CPA has decided to reduce control risk What is the impact on substantive testing sample size if all other factors remain constant? a The sample size would be irrelevant b The sample size would be higher c The sample size would be lower d The sample size would be unaffected Unit & Module to be Assigned To: A-3, M-2 Representative Task: AII-E3.1 Skill Level (Must be R&U or Application Only): Application Page Reference: 14 Correct Answer Choice: C ANSWER: Choice "c" is correct A reduction in control risk would result in a lower substantive testing sample size Choice "a" is incorrect Control risk has a direct relationship with substantive testing sample size (i.e., a reduction in control risk results in a decrease in sample size) Choice "b" is incorrect A reduction in control risk would result in a lower, not higher, substantive testing sample size Choice "d" is incorrect Sample size would be affected Control risk has a direct relationship with substantive testing sample size (i.e., a reduction in control risk results in a decrease in sample size) Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06191 An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income Given this result, which of the following expectations of recorded amounts would be unreasonable? a A decrease in costs of goods sold as a percentage of sales b A decrease in accounts payable c A decrease in retained earnings d A decrease in notes payable Unit & Module to be Assigned To: A-2, M-7 Representative Task: AIII-C1.3 Skill Level (Must be R&U or Application Only): Application Page Reference: 48 Correct Answer Choice: C ANSWER: Choice "c" is correct A decrease in retained earnings would be an unreasonable expectation because the auditor noticed a significant increase in net income Net income closes to retained earnings; therefore, absent any other information, the auditor would expect there would be an increase in retained earnings Choice "a" is incorrect A decrease in cost of goods sold as a percentage of sale would be a reasonable expectation This could explain the increase in net income Choice "b" is incorrect A decrease in accounts payable would be a reasonable expectation for the increase in net income because accounts payable may have decreased as a result of decreases in expenses A decrease in expenses results in an increase in net income Choice "d" is incorrect A decrease in notes payable would be a reasonable expectation for the increase in net income as the decrease in notes payable may result in less interest expense A decrease in interest expense would result in an increase in net income Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06192 Which of the following procedures would an auditor most likely use to identify unusual year-end transactions? a Obtaining a client representation letter b Obtaining a legal inquiry letter c Performing analytical procedures d Testing arithmetic accuracy of the accounting records Unit & Module to be Assigned To: A-3, M-6 Representative Task: AIII-C1.3 Skill Level (Must be R&U or Application Only): R&U Page Reference: 46 Correct Answer Choice: C ANSWER: Choice "c" is correct An auditor most likely would perform analytical procedures to identify unusual yearend transactions Analytical procedures consist of evaluations of financial information made by a study of meaningful relationships among data, which often help highlight unusual fluctuation Choice "a" is incorrect The client representation letter is unlikely to help the auditor identify unusual yearend transactions This letter does not describe specific transactions Choice "b" is incorrect Obtaining a legal inquiry letter is helpful in identifying contingencies, but is unlikely to help identify unusual year-end transactions Choice "d" is incorrect Testing the arithmetic accuracy of accounting records is likely to help discover mathematical errors, but is unlikely to help identify unusual year-end transactions Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06193 Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit? a Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud b Management plans to expand into international operations during the next few years c Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS) d Management believes the company is the premier company in its industry regarding service to customers Unit & Module to be Assigned To: A-4, M-9 Representative Task: AIII-F1.1 Skill Level (Must be R&U or Application Only): R&U Page Reference: 64 Correct Answer Choice: A ANSWER: Choice "a" is correct The auditor is likely to require management to acknowledge its responsibilities for the design and implementation of programs and controls to detect fraud Choice "b" is incorrect The auditor is unlikely to request that management acknowledge their plan to expand into international operations in future years in the management representation letter The management representation letter discusses management assertions at a very high level and generally does not discuss detailed information Choice "c" is incorrect Management would acknowledge that the financial statements are fairly stated in accordance with U.S generally accepted accounting principles (GAAP) or another applicable financial reporting framework, not generally accepted auditing standards (GAAS) Choice "d" is incorrect The auditor is unlikely to require management to comment on their service to customers in the management representation letter Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06194 An auditor is reporting on comparative financial statements for three years Which of the following statements is correct regarding written representations from management? a The representation letter needs to address the prior-year's financial statements not covered in the report b The representation letter needs to address only the most current year covered in the report c The representation letter needs to address only the two most recent years covered in the report d The representation letter needs to address all of the years being covered in the report Unit & Module to be Assigned To: A-4, M-9 Representative Task: AIII-F1.1 Skill Level (Must be R&U or Application Only): R&U Page Reference: 63 Correct Answer Choice: D ANSWER: Choice "d" is correct Management representation letters need to address all of the years being covered in the report Choices "a", "b", and "c" are incorrect, per the above explanation Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06195 Which of the following could indicate source document fraud? a The same customer purchase order number appears on different customer invoices b The same item code appears on different invoices c The same invoice number appears on different invoices d The same invoice date appears on different invoices Unit & Module to be Assigned To: A-3, M-1 Representative Task: AII-D1.1 Skill Level (Must be R&U or Application Only): Application Page Reference: Correct Answer Choice: C ANSWER: Choice "c" is correct The same invoice number appearing on different invoices could indicate source document fraud Each invoice should have its own unique number Choice "a" is incorrect The same purchase order number may appear on different invoices For example, a purchase order may be issued for two items If one of the items is on back order, the entity may issue an invoice for the shipped item and then issue another invoice for the back-ordered item once it ships Both invoices would refer to the same purchase order Choice "b" is incorrect The same item code may appear on different invoices For example, different customers may have ordered the same item, so the same item code would appear on different invoices Choice "d" is incorrect The same invoice date may appear on different invoices, especially if multiple sales occurred on the same day Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06196 A client uses a service organization to process its payroll Which of the following statements is correct regarding the user auditor's use of the service auditor's report on internal controls placed in operation? a The client's auditor can use the service auditor's report to jointly determine the materiality level b The client's auditor can use the service auditor's report without inquiring about the service auditor's reputation c The service auditor's report should be referred to in the report of the client's auditor d The client's auditor can use the service auditor's report as audit evidence for the client's internal controls Unit & Module to be Assigned To: A-5, M-5 Representative Task: AII-C3.2 Skill Level (Must be R&U or Application Only): R&U Page Reference: 60 Correct Answer Choice: D ANSWER: Choice "d" is correct The client's auditor can use the service auditor's report as audit evidence for the client's internal control Choice "a" is incorrect The client's auditor should not use the service auditor's report to jointly determine the materiality level Materiality is determined by the auditor's assessment of the needs of financial statement users and not by the service auditor's report Choice "b" is incorrect In considering whether the service auditor's report is satisfactory for his or her purposes, the user auditor should make inquiries concerning the service auditor's professional reputation Choice "c" is incorrect The client's auditor should not make reference to the service auditor's report when issuing an unmodified opinion The client’s auditor is permitted, but is not required, to make reference to the work of a service auditor to explain a modification of the user auditor’s opinion Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06197 During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements The fraudulent transactions can be adjusted so the statements are not materially misstated What should the auditor do? a Report the matters to regulatory authorities b Consider the fraud a scope limitation and disclaim an opinion c Communicate the matter to those charged with governance d Immediately withdraw from the engagement Unit & Module to be Assigned To: A-3, M-1 Representative Task: AI-E3.1 Skill Level (Must be R&U or Application Only): R&U Page Reference: Correct Answer Choice: C ANSWER: Choice "c" is correct Fraud involving an officer should be reported to those charged with governance Choice "a" is incorrect Disclosure of fraud to a regulatory agency is not required in this situation Ordinarily, the disclosure of fraud to parties outside of senior management and those charged with governance is not part of the auditor's responsibility Choice "b" is incorrect This situation does not represent a scope limitation The auditor was able to gather enough evidence to know the amount of the fraud Choice "d" is incorrect The auditor does not need to immediately withdraw Instead, the auditor should first notify those charged with governance If those charged with governance not take appropriate action, then the auditor should consider withdrawing Page of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing CPA-06198 Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? a Validation of purchase transactions b Verification of existence of inventory c Authorization of the manufacturing orders d Posting and summarization of inventory transactions Unit & Module to be Assigned To: A-4, M-4 Representative Task: AIII-C6.1 Skill Level (Must be R&U or Application Only): Application Page Reference: 21 Correct Answer Choice: B ANSWER: Choice "b" is correct The control objective of verification of the existence of inventory is achieved when reviewing and testing control procedures over the physical inventory count In a physical inventory count, the auditor inspects the inventory to verify its existence and condition Choice "a" is incorrect The control objective of validation of the purchase transaction objective would not be achieved by reviewing and testing control procedures related to the physical inventory count Purchase (and sale) transactions not typically occur during a physical inventory count, and therefore are unlikely to be part of the control procedures and testing for the physical inventory count Choice "c" is incorrect The control objective of authorization of manufacturing orders would not be achieved by reviewing and testing control procedures related to the physical inventory count The testing of proper authorization of manufacturing orders would occur as a separate test, not during the physical inventory count Choice "d" is incorrect The control objective of posting and summarization of inventory transactions would not be met by reviewing and testing control procedures related to the physical inventory count Generally, no inventory transactions (i.e., purchases or sales) occur during the physical count Page 10 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing 47 CPA-06235 Which of the following matters does an auditor usually communicate to management? a Arrangements involving a predecessor auditor b Indications of adverse key financial ratios c An agreement regarding preliminary materiality thresholds d Identification of recurring operating losses Unit & Module to be Assigned To: A-2, M-3 Representative Task: AI-E3.1 Skill Level (Must be R&U or Application Only): R&U Page Reference: 20 Correct Answer Choice: A ANSWER: Choice "a" is correct The auditor usually communicates with management about arrangements involving a predecessor auditor Choice "b" is incorrect The auditor generally does not communicate indications of adverse key financial ratios to management Choice "c" is incorrect The auditor usually does not communicate materiality thresholds to management Choice "d" is incorrect The auditor typically does not communicate with management about recurring operating losses Page 48 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing 48 CPA-06237 In which of the following engagements would a practitioner provide limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date? a A compilation of a financial projection b A review of pro forma financial information c An examination of management's discussion and analysis d An audit of condensed interim financial information Unit & Module to be Assigned To: A-5, M-4 Representative Task: AIV-B1.1 Skill Level (Must be R&U or Application Only): R&U Page Reference: 48 Correct Answer Choice: B ANSWER: Choice "b" is correct A review of pro forma financial information provides limited assurance about the effect of a future or hypothetical event (in this case, a change in capitalization) by showing how it might have affected the historical financial statements if it had occurred at an earlier date Tip: This question can be quickly answered by knowing that reviews provide limited assurance Choice "a" is incorrect A compilation provides no assurance In addition, this engagement does not describe reporting on a financial projection A financial projection presents an entity's expected financial results based on one or more hypothetical assumption based on conditions the entity expects would exist and the course of action it expects would be taken given the assumptions Choice "c" is incorrect An examination provides reasonable assurance In addition, this engagement does not describe reporting on management discussion and analysis Management discussion and analysis is a written explanation provided by management about the past and future performance of the entity Choice "d" is incorrect An audit provides reasonable assurance In addition, this engagement does not describe reporting on condensed interim financial information Condensed financial statements present financial results in considerably less detail than complete financial statements Page 49 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing 49 CPA-06238 (Adapted) A report on an issuer's integrated audit must include each of the following statements, except: a The audit was conducted in accordance with AICPA standards b The auditor believes the audit provides a reasonable basis for the issued opinion c Management is responsible for maintaining effective internal control d The audit includes obtaining an understanding of internal control over financial reporting Unit & Module to be Assigned To: A-5, M-2 Representative Task: AIV-A3.2 Skill Level (Must be R&U or Application Only): R&U Page Reference: 22 Correct Answer Choice: A ANSWER: Choice "a" is correct A report on an issuer's integrated audit must include the statement that the audit was conducted in accordance of the standards of the Public Company Accounting Oversight Board (not AICPA standards) Choice "b" is incorrect A report on an issuer's integrated audit must include the statement that the auditor believes the audit provides a reasonable basis for the issued opinion Choice "c" is incorrect A report on an issuer's integrated audit must include the statement that management is responsible for maintaining effective internal control Choice "d" is incorrect A report on an issuer's integrated audit must include the statement that the audit includes obtaining an understanding of internal control over financial reporting Page 50 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing AUDITING 2017 AICPA Newly Released Sims Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 3057_01 Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID: A4_Sim (116) / Task Physical Inventory Results (AICPA R-2017) Application AIII-D3.2 2109 Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 3057_01 (Selection List) Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 3057_01 (Solution) Tip: Several selections can be quickly eliminated by knowing whether the transaction is a sale or purchase of inventory Test count No 1—Inspect supporting purchase documents for proper shipping terms and receiving information to verify inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records The client's explanation was that it included in its records inventory that was shipped FOB shipping point, which was received on September 2, Year This explanation indicates that it is a purchase of inventory because the client received inventory Items purchased with FOB shipping-point terms require the client to record the items as inventory as soon as the vendor ships the inventory Therefore, the auditor should inspect supporting documents to support the client's explanation Specifically, the auditor should verify proper shipping terms (that it is FOB shipping point) and receiving information (verify number of items received) to verify the amount to be included in the inventory count Test count No 2—Inspect supporting sale and shipment documentation for proper shipping terms for inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records The client's explanation was that the inventory was sold to a customer FOB destination and was not received by the customer until September 2, Year Inventory sold means that this is a sale of inventory Items shipped FOB destination require the client to record the sale and relief of inventory when the item has reached its destination In this case, the sale and relief of inventory will be recorded on September 2, Year (after fiscal year-end) Therefore, the auditor should inspect supporting documents to corroborate the client's explanation Specifically, the auditor should inspect supporting sale and shipment documentation for inclusion of these items in the inventory count Test count No 3—Inspect supporting purchase documents for proper shipping terms and receiving information to verify inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records The explanation provided was that payments were made in advance for items received September 2, Year This transaction relates to a purchase transaction because the client is paying for items The auditor needs to verify that the items should be included in the count (i.e verify the items were shipped FOB shipping point and were shipped prior to or on August 30) The auditor should inspect supporting purchase documents for proper shipping terms and receiving information to verify inclusion in the inventory count Test count No 4—Request that client make appropriate correction to record additional inventory In this test count, the auditor's test count quantity was more than the inventory quantity per client records The explanation provided was that inventory was received on August 30, Year 1, but the vendor shipment receipt was not recorded Inventory received prior to year-end needs to be included in the inventory count Therefore, the auditor should request that the client make an adjusting journal entry to record the additional inventory Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Test count No 5—Inspect supporting sale and shipment documentation for proper shipping terms for inclusion in inventory count In this test count, the auditor's test count quantity was less than the inventory quantity per client records The explanation provided was that inventory was separated for a September sale (after fiscal year-end) and was held on dock for customer pickup The items should be included in the count as of August 30 because this sale is after year-end Therefore, the auditor should inspect supporting sale and shipping documentation for proper shipping terms (which would say customer pickup) for inclusion in the inventory count Test count No 6—Review return shipment documentation to verify exclusion from inventory count In this test count, the auditor's test count was more than the inventory quantity per client records The explanation provided was that additional items were identified as damaged and will be returned to the vendor Therefore, the auditor should review the return shipment documentation to verify that this inventory should be excluded from the inventory count Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 531_01 Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID: A4_Sim (105) / Task Journal Entry Testing (AICPA R-2017) Application AIII-C6.2 2112 Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 531_01 (Selection List) Page of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 531_01 (Solution) Journal entry No 1—Obtain management's bonus plan and eligible employee list and recalculate expense The auditor is trying to corroborate the journal entry and related explanation This journal entry relates to compensation for Year (DR Salaries and wages expense) that will be paid in the subsequent year (CR Accrued liabilities) To verify the accounts and the related amounts, the auditor should obtain management's bonus plan and eligible employee list and recalculate salaries and wages expense to verify that it is at the appropriate amount Journal entry No 2—Confirm with the controller any changes in estimates This journal entry is to adjust a machine's depreciation expense Depreciation expense is affected by changes in estimates (i.e., useful life) Changes in estimates are accounted for in the current year and prospectively Therefore, the accounts utilized (accumulated depreciation and depreciation expense) appear appropriate To obtain support for this adjustment, the auditor should confirm with the controller any changes in estimate (and recalculate the expense) Journal entry No 3—Review board minutes for change in classification of long-lived assets In this journal entry, there is a change in classification of an investment from held-to-maturity (non-current asset classification) to trading security (current asset classification) Investment classification is based on the intent of the client (i.e., holding the security to sell in the near future = trading; holding the investment until it matures = held-to-maturity) To obtain support for the change in classification of this long-lived asset, the auditor should review board minutes to verify the intent of this investment Journal entry No 4—Propose adjusting entry to debit prior-year retained earnings This journal entry relates to an adjusting journal entry that was proposed by the auditors related to the Year financial statements Because this is a correction of Year financial statements and not Year 2, the journal entry should be a debit to retained earnings Correction of errors related to Year financial statements should not affect the Year income statement Journal entry No 5—Obtain financial statement of subsidiary This journal entry is recording subsidiary income for Year Based on the journal entry, the investment is accounted for under the equity method Under the equity method, when the investee reports income, the investor (the client) records a DR Investment in stock (referred to in our FAR book as investment in investee) and CR Investment income (referred to in our FAR book as equity in earnings/investee income) The amount recorded is based on the percentage ownership of the company For example, if the investee reports $100 on its income statement and the client owns 25 percent of the entity, then the auditor would expect an amount of $25 to be recorded The auditor should obtain the financial statements of the subsidiary and then recalculate this amount Page 10 of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 4246_01 Research Unit & Sim # / Task Position Sim Task Name: Skill Level: Representative Task: Web Repo ID: A5_Sim (111) / Task Research (AICPA R-2017) Application AIV-B1.1 2100 Page 11 of 12 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing Task 4246_01 Research (Solution) AT-C 395.86 Keywords: Report Date MD&A For best results: • • • Click on "advanced search" In "containing all these words" type Report Date MD&A Click on "search" Page 12 of 12 Registered to David Lewis (#813712) .. .2017 AICPA Newly Released Questions—Auditing 2017 AICPA Auditing Newly Released MCQs—Medium (Moderate) Rating CPA-06155 As a result... noncompliance Page 26 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Questions—Auditing 2017 AICPA Auditing Newly Released MCQs—Difficult (Hard) Rating 26 CPA-06215 An auditor... reporting Page 50 of 50 Registered to David Lewis (#813712) 2017 AICPA Newly Released Simulations—Auditing AUDITING 2017 AICPA Newly Released Sims Page of 12 Registered to David Lewis (#813712)